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The move by the Reserve Bank of Australia to cut the cash rate by 25 basis points today is positive news for the real estate industry and combined with other official interest rate drops this year, will have a beneficial impact on the sector.
The collective 75-basis-point drop in the cash rate over May and June has gone some way to improving confidence in the housing sector, but the latest rate cut was necessary in order for the real estate industry to see a sustained improvement in conditions.
This year’s rate cuts have contributed to a significant improvement in housing affordability and allowed households additional capacity to repair their balance sheets, and today’s 25-basis-point cut will only help the situation further.
These drops have gone some way to improving confidence amongst consumers, who have been exercising caution particularly due to the financial situation in the eurozone.
But while this week's 0.25-percentage-point drop in the cash rate is welcome news, more cuts are needed this year.
Last month it appeared likely that the RBA would need to reduce rates by another 25 to 50 basis points before the year’s end, the reasoning being that a pre-emptive measure would kill off evidence of a slowing economy.
Over the last month the softness has continued and the bank has found reasons to adjust its settings, dropping the cash rate by 25 percentage points. But the question now becomes ‘Is that enough?’ And from a property perspective it is not.
More cuts to the cash rate are needed, with the justification being the softness of the inflation figures, and more importantly, the easing in the jobs market.
Inflation remains low rising only 1.2% during the 12 months to June 2012, compared with a rise of 1.6% through the year to March 2012. Underlying inflation is also limited increasing by 0.6% during the second quarter of 2012, taking the annual increase to 1.9%.
Such low results are reflective of a national economy that is entering a slowing phase.
 
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Meanwhile, the most important market for the property sector – the jobs market – is showing clearer signs of weakening. Although the latest labour market trend data shows the unemployment rate remains at the healthy level of 5.2%, where it has settled over the past four months, monthly full-time jobs growth has disappeared.
Data for full-time jobs, which is the key driver of the residential property market, shows there was a contraction (600) in the number of positions nationwide in August. This follows a previous contraction (500) in July.
Over the 12 months to August 2012, full-time employment actually increased by 27,900 jobs, and while this is the largest increase over a 12-month period since October 2011, it is far below trend.
Further evidence of an easing in labour demand has been provided by recent trends in job advertising. The ANZ Job Advertisement Series showed that number of job advertisements fell 2.3% in August after falling 0.8% in July. This represents the fifth consecutive monthly fall.
Of particular interest has been the weakening trend in Queensland, Western Australia and the Northern Territory, which have been the regions benefiting most from the mining boom. Job advertising has now been weakening for around six months in each of these states and territories.
Looking ahead to the RBA’s Melbourne Cup Day meeting, ABS Retail Trade and Building Approvals data – due for release on Thursday – will provide some further clues as to whether the bank will cut the cash rate further.
It is the labour force data that is likely to remain in focus, however. One more month of retreating full-time jobs numbers should be enough to tip the scale in favour of another Melbourne Cup Day cut.
And what a beautiful Melbourne Cup quinella it would be for the national property market if the RBA firstly announced the drop in rates and secondly, if the banks passed on the full impact.
Mark Courtney is research director at <a target="_blank" href="https://www.colliers.com.au/">Colliers International.</a>
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Mark Courtney

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